Tariff Headwinds And Consumer Downtrading Will Pressure Margins And Limit Long-Term Earnings Potential

Catalysts

About AB Electrolux

AB Electrolux designs, manufactures and sells household appliances and related products globally.

What are the underlying business or industry changes driving this perspective?

• Heightened and prolonged tariff headwinds for imported components and finished goods risk compressing pricing power just as competitors resist passing through higher costs. This could cap revenue growth and structurally depress operating and net margins.
• Persistent consumer downtrading to lower price points in Europe and North America, combined with intense promotional activity around key sales periods, may undermine the company’s premium mix strategy and limit earnings expansion even if unit volumes stabilize.
• A structurally weaker construction and built in kitchen market in Europe, now at roughly decade low levels with no clear rebound, threatens long term demand for higher value kitchen products and could keep regional EBIT margins subdued for years.
• Growing competitive pressure from Asian manufacturers in both Europe and Latin America, enabled by favorable cost structures and rising brand acceptance, risks eroding market share in mass segments and constraining top line growth while forcing Electrolux to sacrifice margin to defend positions.
• Reliance on continuous cost efficiency programs and product redesign to offset negative external factors such as currency volatility and inflation suggests diminishing incremental savings over time. This could slow improvement in EBIT and earnings once the current SEK 3.5 billion to SEK 4 billion program matures.

Assumptions

This narrative explores a more pessimistic perspective on AB Electrolux compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming AB Electrolux's revenue will remain fairly flat over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.4% today to 3.0% in 3 years time.
• The bearish analysts expect earnings to reach SEK 4.1 billion (and earnings per share of SEK 14.75) by about December 2028, up from SEK 562.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SEK5.1 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 4.5x on those 2028 earnings, down from 30.1x today. This future PE is lower than the current PE for the GB Consumer Durables industry at 30.1x.
• The bearish analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.12%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Electrolux is already regaining growth momentum, with 4.6% organic sales growth in the third quarter and double digit growth in North America. Sustained share gains across its three core regions could drive structurally higher revenue than expected over the coming years, supporting a higher long term share price.
• The company is executing large scale cost efficiency and product redesign programs, having already delivered SEK 2.8 billion of savings year to date toward a SEK 3.5 billion to SEK 4 billion full year target. If these structural savings prove durable and repeatable, long run operating margins and earnings could rise materially above the pessimistic scenario.
• Electrolux is steadily pivoting toward core and premium brands such as Electrolux, AEG and Frigidaire Gallery, supported by sustained innovation and marketing investment in features like energy efficient dishwashers and new cooking platforms. A successful premium mix shift over the cycle would provide upside to both revenue and net margins.
• North American and Latin American manufacturing footprints, including five regional plants and USMCA compliant production, position Electrolux to benefit over time from tariff structures that disadvantage Asian imports. If pricing in those markets normalizes in line with tariffs, this could significantly lift regional EBIT margins and group earnings beyond bearish expectations.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for AB Electrolux is SEK50.0, which represents up to two standard deviations below the consensus price target of SEK74.88. This valuation is based on what can be assumed as the expectations of AB Electrolux's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK103.0, and the most bearish reporting a price target of just SEK50.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be SEK135.3 billion, earnings will come to SEK4.1 billion, and it would be trading on a PE ratio of 4.5x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of SEK62.5, the analyst price target of SEK50.0 is 25.0% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.